My client has several life insurance trusts all correctly filled in and dated 12 years ago. He has never sent them to the insurers and has been told by his bank that as a result the trusts are ineffective. My understanding was that provided the Life Company Trust form or any other Trust Deed is correctly drafted, signed, witnessed and dated, it constitutes a trust from that date.
My client has been told that the trust is not effective until registered with the insurer and that therefore HMRC can discount it. Has anyone any thoughts to offer?
Has the client since submitted the papers or, perhaps, copies of them (to ensure they do not get misplaced) to the life company for their view? If this is dealt with whilst the life assured is still alive, they can answer any queries raised by the life company.
So far as I am aware, all lodgement with the life company does is ensure that the policies are recorded in their books as having been assigned to the trustees.
If notification to an asset holder was required to perfect the trust then, for example, with trusts over shares, the company registrar would need to record the trust on the title, which Company Law forbids.
Subject to the forms having been correctly completed, which includes the policy numbers being included, I would expect the existence of the trusts to be honoured by HMRC and, once lodged with the life company, by the life company.
Until the life company has knowledge of the assignment, upon the death of the life assured, it will likely only pay the proceeds of the policies to the personal representative(s) of the life assured, who would then have to account to the trustees. Especially should the proceeds be intended to finance the IHT liability on death, consideration should be given to lodging the papers with the life company so that the proceeds can be paid out promptly following the death of the life assured.
I would not expect a bank to give a legal opinion on something like this, unless it was relevant to a proposal under consideration, in which case the bank’s legal department might have opined (or external advice sought). It might be worthwhile asking the bank for a copy of the advice in support of the contention to be satisfied that it is not just an “off the cuff” response from a member of staff seeking to be “helpful”.
The trusts are binding on your client, the settlor. The purpose of registering the trusts with the insurer(s) is so that the company is on notice and therefore required to pay the insured benefits to the trustees, rather than the policyholder. It is not a condition of their validity.
If memory serves, trusts of life policies can sometimes be created by means of a “trust request” whereby the life office will issue the policy being applied for to the applicant as trustee subject to the terms of the trust as specified. Assuming that this doesn’t apply in this instance, then for the grantee’s rights to be transferred to a third party (the trustees) without consideration, contract law would require a formal assignment of rights by deed (albeit that such an assignment could be embraced within the trust wording) and for this to be served upon and acknowledged by the life office. Unless all three of these of these requirements have been complied with, the life office would have to pay the proceeds to the policyholder or their representatives because if they didn’t, the life office would not have discharged its liability under the contract.
Notwithstanding, I think that the question is whether the lack of a formal assignment means that the policy/ies in question are not assets of the trusts in question and/or whether the policy proceeds comprise part of the taxable (for IHT) estate of the grantee or not (the treatment of the policy premiums meantime is also at issue, assuming that these were paid by the grantee throughout).
From the narrative, it looks like no assignments have been produced/served and thus my thought would be that therefore the policies are not assets of the trust and thus are presently part of the taxable estate of the grantee. More than happy to be shot down in flames however.
As the other respondents have said, the lack of notice does not invalidate the trust. Title to the policy is generally transferred by an assignment, although some consider that s40 Law of Property Act 1925 can provide an alternative mechanism (I have found life companies disagreeing about s40, so I always use an express assignment. The ‘trust instrument’ would normally contain (or sometimes be accompanied by) an assignment. However, after the death of the original policyholder (if he/she is the life assured) the life company will not be obliged to pay to anyone other than the policyholder’s PRs, until such time as the life company has received notice of the assignment. Typically, if the trust instrument does not contain an assignment, the legal title to the policy is not transferred.
Nevertheless, where there is an assignment, you need to notify the life company, otherwise it will not pay to the trustees: with thanks to legislation.gov.uk - s3 Policies of Assurance Act 1867 reads (my emphasis):-
“No assignment made after the passing of this Act of a policy of life assurance shall confer on the assignee therein named, his executors, administrators, or assigns, any right to sue for the amount of such policy, or the monies assured or secured thereby, until a written notice of the date and purport of such assignment shall have been given to the assurance company liable under such policy at their principal place of business for the time being, or in case they have two or more principal places of business then at some one of such principal places of business, either in England or Scotland or Ireland; and the date on which such notice shall be received shall regulate the priority of all claims under any assignment; and a payment bona fide made in respect of any policy by any assurance company before the date in which such notice shall have been received shall be as valid against the assignee giving such notice as if this Act had not been passed.”
If the life assured/grantor has executed the trust deed declaring a trust over the life policies, the fact that the benefit of the policies has not been transferred to the trustees in the life company(ies) books does not prevent the policies being impressed with the trust.
The life company(ies) need for a valid discharge from the person(s) entitled to the proceeds of claim under the original contract does not remove from such persons any duty to account to the trustees for the proceeds.
In the case of T Choithram International SA v Pagarani [2000] UKPC 46 http://www.bailii.org/uk/cases/UKPC/2000/46.html , Mr Pagarani had executed a trust deed by which he was to be one of several trustees, and verbally declared that his assets were to be held by him on the terms of the trust. The assets included shareholdings and monies held in various banks. Mr Pagarani died before he was able to arrange to transfer any of the assets to the trustees. The Privy Council held that the assets in question had been impressed with the terms of the trust.
If a failure to assign legal title to trustees is a stumbling block, then it may also cast doubt on arrangements where, say, a parent makes a declaration of trust over their home, creating a trust of land to include their children as beneficiaries, with no change to the title at HM Land Registry.
Many thanks to all contributers. In brief my take is that although not a requirement for the trust to be effective, it is wise to inform the insurer before rather than after the clients, death in order to facilitate the transfer of funds to trustees without delay or administrative burden.
That is right. The trustees could indeed present the trust instrument to the insurer after the death, but that may lead to an unnecessary delay and, potentially, the funds may become irrecoverable. It could be that there is a defect in the in trust/assignment and the insurer does not accept it for some reason, by which time it may be too late to rectify it. Alternatively, the insurer may already have paid the money over to the personal representatives of the life assured before the trustees even approach the insurer and the money may have disappeared. It must surely be proper to notify the insurer as soon as reasonably practicable after the policy is written in trust.